Interview titled Mr Consistent returning incredible returns with Nithin Kamath, Zerodha published on December 21, 2013
Featured in Hindu Businessline article. How stocks became their bread and butter back in 2015
I have been hearing some stories of traders/investors who have lost quite a sum of money in the last few days. Worrisome part is that some folks have borrowed money for trading and have lost it as well. Few other folks who are managing other’s money (PMS) have also lost substantial amount too.
These kind of losses happen in trading profession (especially for the uninitiated) and all is not lost here. So, thought of writing this post to see how to take this losses in a positive stride.
1. Taking ownership of losses – No one is responsible for our losses except us. Not the market, not the system, not the people who gave us the money to trade. We have to realize that we were wrong, we had taken too much risk, and we were employing trading methods that did not work. Period. No point in blaming outside manipulators of markets or bad luck. We, as traders, need to accept that we have completely and utterly made a hash of things (really no choice here and this is not a luxury we can afford). In a job scenario, we can blame others and get away with it but not in trading.
2. Stop trading right away – a trader might not like to hear it but this is absolutely necessary.
Take the time to process what had happened, figure out what was done wrong, and make radical changes in the approach to markets. Jumping from one system to another will not cut it. Most of us try to tweak our system after a heavy hit. Optimizing the system based on last 6 month of market performance would not cut it. Just a small time-based break would soothe off the mind a bit. Most of the times, this should be enough to come back as a different trader.
3. Refocus and relearn – Use the time away from trading to work on other aspects of your life and career. Create alternate streams of income so that one doesn’t depend on trading income alone. ‘Depending on trading income’ in the initial stages of trading is probably the biggest sin in trading.
Trader should try to focus on building the self-image with other aspects of life not just with trading. In doing that activity, he can remain opportunity-focused and not regret-focused. Please stay focused on what you could control, not on what you could not.
4. See the setback as an opportunity to bounce back – I am sure the loss was very painful. Make sure that you would never go through such an episode again. Try to create a new balance between trading and the rest of your life so that you would never be dependent upon trading results for your happiness and fulfillment.
5. Handling depression – a trader need to figure out how to handle depression. More so, a losing trader. It is better to handle it heads on than brushing the episode aside and continuing to lose money in a state of denial.
Depressed feelings are a normal response to loss: the loss of money, the loss of dreams. Sometimes you have to go through that loss before you can come out the other side as a different person, one who has learned from the experience. So, please stay positive.
6. Get out of need to make money mindset – If a trader gets attached to the need to trade and make money–and once his perfectionistic voice of “I should have bought there” and “I should have sold here” in hindsight kicks in –he is no longer grounded in markets. It’s when those frustrations build over time, becoming self-reinforcing, that traders lose discipline and focus and eventually perish. Mental rehearsals would help in these cases.
By staying physically relaxed in one’s breathing and posture and by mentally rehearsing a mindset in which it is OK to miss moves–there will always be future opportunity–traders can prevent many of these train wrecks.
7. Trading too large for our account size – Swing in the equity curve almost always is proportional to the negative effect on trader’s psyche. Higher the swing, higher the negative effect on pysche and the vice-versa.
When we trade size that is too large for our account size, we subject ourselves to drastic swings in P/L, and that subjects us to drastic swings in mood. In turn, we then make trading mistakes that bring a negative expectancy to each trade, and the size eventually blows us up.
As they say, in trading, if we create drama in your returns, we’ll create trauma–and that’s how trading career end.
8. Understand failure – Knowing the worst-case outcome if this trade happens to fail can reduce the fear inflicted by a previous failure from an unseen event. Black swan events aren’t common, so it’s not reasonable to fear them every time you approach a setup. Weigh the potential for loss, and if it’s outweighed by the potential for gain, the probabilities are favorable enough to participate.
9. Psychologically, it’s healthy to experience defeat and then overcome it – It strengthens you to battle back and win. If you lose the wrong way–by taking so much risk that you can’t come back for the day, week, month, or year–you rob yourself of the victory that could be yours by going from red to green.
10. Make a choice to move forward – All of us have the ability to choose, whether it’s our career or our spouse or our attitude. Maybe your fear somehow gives you comfort right now, because it’s been a habit you’ve allowed. That won’t cut it though, so it’s time to change. Eventually, you either decide to get back on the right path, or you’re completely done trading. Make your choice and get on with it—and don’t look back.